Reading 4) What is the relation between economy and globalization?

 [Summary]

This article focuses on the economy and globalization of the Transnational Corporation (TNC). The definition of TNC is 'An entity that has the power to coordinate and control operations in one or more countries'. The TNC appeared in earnest in 1914, just before World War I. Manufacturing companies in the U.S., the U.K., and some in Europe began to emerge as they became more and more transnational.

 

Currently, the number of TNC is about 61,000, and they produce international products through more than 900,000 overseas affiliates. Their size accounts for about one-tenth of the world's gross domestic product and generates one-third of the world's total exports. Most of them are handled by a small number of large TNC. These companies are called global companies, and they are known to do business around the world and have little loyalty to a particular country or community. What TNC have in common is that they operate in different political, social, and cultural environments. In addition, the number of TNC in developing countries is increasing as foreign direct investment (FDI) increases. The diversity of TNC in the global economy is increasing.

 

So, why or how does a company become transnational? There are so many different reasons for TNC activities, but in a large sense, they can be summarized into two categories: market-centric investment and asset-centric investment.

 

Much of TNC's investment is market-oriented. Because, depending on the size of the economy in the country in which the entity belongs, it may have reached the saturation point. Then they are trying to expand into the global market to generate revenue. The nature of the market also affects investment in TNC. The TNC is also influenced by the political and cultural reasons of certain countries. Therefore, both the size and characteristics of the market are influencing the positioning of TNC.

 

The disproportionate distribution of resources is one of the main factors that makes transnational investments by businesses. In addition, one of the major factors is that assets to produce and sell products and services are also unbalanced. In the past, investment by TNC was influenced by geographical imbalances centered on labor. Recently, labor is of course important, but TNC's investment is dependent on the imbalance of highly educated human resources with technology. Therefore, recent investments by TNC have been concentrated in East Asia, India and Eastern Europe, which boast excellent human resources and low costs.

 

Two ways for companies to carry out transnational activities are in conjunction with other companies represented by "green fields" investment and M&A. First, greenfield investment refers to building a whole new facility in the area. For example, factories, R&D centers, sales and distribution centers. This approach is the most preferred type of investment by the host country. However, building a facility from scratch carries great risks.

 

Therefore, many companies tend to prefer investments based on their links to existing companies through M&As. In fact, recent growth of FDI is being promoted through M&A. If it is not M&A, there are many cases in which strategic partnerships are established between companies. In such cases, the two competitors form a strategic alliance, in which cooperation and competition interact. In particular, it is actively happening in areas such as semiconductors and automobiles.

 

The process in which TNC are developed is as follows. First, it controls the domestic market. Second, entering overseas markets for the first time is done through local independent sales agents. Third, a company independently establishes and enters an overseas store. In this process, investment in greenfield or M&A occurs. If such a process is the development process of traditional TNC, it is often rooted out in overseas markets, not in the domestic market from the beginning.

 

Geographic factors also play an important role in the characteristics of TNC. A long-lasting national system or tradition still affects corporate decisions. This can be found in empirical studies in East Asia, where even countries with similar characteristics, such as Korea and Taiwan, have clearly created different types of corporate organizations.

 

All companies constitute a complex production, distribution and consumption network. TNC also make up a very dense network. TNC are much more difficult to manage networks due to their geographically dispersed nature. Because geographical requirements vary in each field, such as management, R&D, and marketing, TNC tends to develop space according to the characteristics of each field.

 

From the perspective of TNC, regional strategies can represent ideal solutions to organizational responsiveness and competitive pressures for global integration. Both large TNC and organizations in transnational production networks are incredibly complex and dynamic. The networks constituted by the TNC are heavily influenced by the WTO or by international regulatory bodies that establish technical standards. Since international agencies are only sanctioned by the state, the transnational production network is also affected by the country's political structure. Therefore, it is nonsense to argue that the state is universally powerless against the TNC. TNC is powerful but not absolute.

 

[Interesting Point]

The interesting part of reading this article was the process of developing TNC. It has come to be very interesting to know TNC's business strategy through geographical imbalances between resources and assets. It was also interesting to note that it would be difficult for a nation to beat the TNC unless it was a hegemon nation, but it was possible to keep it in check through regulations using international organizations.

 

[Discussion]

What I want to read and talk about is that it would be fun to talk with you about what is the success factor of Samsung, Korea's representative TNC. I thought it would be fun to look for other success factors other than IT intellectual resources.